vertical integration

MANY NO LONGER NEED THE MIDDLEMAN – 3 OBSERVATIONS

Few trends, in my view, are more exciting than the trend towards vertical integration. More and more businesses are recognising the power of vertical integration.

Most of the world’s largest retailers are at least partially vertically integrated. Those largely vertically integrated include:

  • Ikea
  • Zara
  • H&M

In addition, there is a growing number of retailers who increasingly sell home brand products, [produced exclusively for them. These include:

  • Aldi
  • Coles
  • Woolworths

I confidently predict that the vast majority of retail businesses and, indeed, the majority of businesses will be vertically integrated within 10 years. I can see no good reason why they would not be. Middle men are adding less and less value.

Consider the many advantages of vertical integration including:

  • Increased cost competitiveness
  • Increased margins
  • Increased control

Cutting out a middleman who adds little value can cut costs and provide the capacity to boost margins. Increased control over the production and sales processes by the one business increases the capacity to consistently, and more accurately, meet and exceed customer expectations.

Much of the vertical integration to date has been from the top down – involved retailers moving back to production and manufacturing – either getting more control over existing players or getting directly involved themselves. In the future, however, more of this vertical integration will be from the bottom up – with producers and manufacturers retailing their own products.

There have been elements of this for some time with growers selling fresh produce in markets and manufacturers setting up small retail outlets in fashion, food, and a range of other areas. It is, however, e-commerce that will accelerate vertical integration involving producers and manufacturers becoming retailers – especially with the rapid growth of online market places such as:

  • E-bay
  • Amazon
  • Alibaba

These marketplace businesses, and an increasing number like them, enable businesses of all shapes and sizes to retail online cost effectively and, indeed, internationally. In its best trading day of 2016, Alibaba sold $12 billion worth of product – the vast majority directly from producers or manufacturers.

The days of intermediaries such as wholesalers and distributors appear limited in most sectors.

This will, of course, have significant implications for marketing – bringing the producer or manufacturer closer to the customer, increasing price flexibility, providing greater control over distribution, facilitating more effective tracking, and meaning that producers and manufacturers will need to communicate very effectively with end consumers.

It will also create very real opportunities for small producers and manufacturers now struggling for margin.

TRUST ME

  1. Vertical integration will increasingly dominate over the next 10 years.
  2. Vertical integration impacts on price, margins, and most importantly – control.
  3. E-Commerce marketplaces are enabling small producers and manufacturers to become retailers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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